Gemstar Ex-CEO Is Ordered To Pay $22.3 Million Henry Yuen's Civil Penalty Is Among Largest Sought By SEC Against Individual
By JANE SPENCER and KARA SCANNELL Wall Street Journal May 9, 2006; Page A3 http://online.wsj.com/article/SB114713467418347300.html?mod=home_whats_news_us In one of the largest civil penalties the Securities and Exchange Commission has ever obtained against an individual in an accounting-fraud case, a federal judge has ordered Henry C. Yuen, former chief executive officer of Gemstar-TV Guide International Inc., to pay $22.3 million for his role in a fraud that led the company to overstate revenue by more than $225 million between 2000 and 2002. The ruling comes four years after the SEC launched its investigation of Gemstar, a once highflying Hollywood company that publishes TV Guide magazine and holds patents on technology used for cable- and satellite-television programming guides. Earlier this year following a three-week trial, U.S. District Judge Mariana Pfaelzer found Mr. Yuen liable for securities fraud, lying to auditors and falsifying Gemstar's books. Under the ruling, Mr. Yuen will also be permanently barred from serving as an officer or director of a publicly traded company. "This is a case of intentional deception and fraud," says Randall R. Lee, director of the SEC's Los Angeles office. "Yuen's profits while he was carrying out this fraud were phenomenal by any definition." In partnership with Rupert Murdoch's News Corp., which owns 41% of Gemstar, Mr. Yuen had sold investors on the idea that a coming explosion in interactive television would turn his company into a gold mine. At one time in 2000, Gemstar had a market value of more than $20 billion. But interactive television didn't take off. Instead, in early 2002, the company acknowledged that revenue had been inflated. The stock price collapsed. (Once over $90 a share, it now sells at less than $4.) The SEC launched its probe, and federal prosecutors began a criminal investigation. News Corp. was forced to write down $6 billion in losses. Mr. Yuen was forced out as chairman and CEO. During the period of the fraud, the SEC says, Mr. Yuen collected close to $100 million in salary, bonuses, and profits from Gemstar stock transactions. Until this past April, when Gemstar cut off most payments, Mr. Yuen continued to receive more than $2.5 million a year in salary, patent rights and benefits from Gemstar. Mr. Yuen says the company still owes him $29 million in severance, which Gemstar is disputing in arbitration. Mr. Yuen's lawyer in the SEC case, Stanley S. Arkin, says the ruling will be appealed. At the SEC trial, Mr. Arkin acknowledged Mr. Yuen could be aggressive, but said he never violated the law. The defense also noted that numerous people signed off on Gemstar's accounting, including lawyers and KPMG LLP auditors. Mr. Yuen has not been charged with any criminal wrongdoing directly related to the fraud that triggered the investigation. Indeed, current executives of Gemstar and a lawyer for the SEC complain that criminal prosecutors have dropped the ball in their pursuit of the case. "I firmly believe there is a case for criminal prosecution for accounting fraud and securities violations against Mr. Yuen," said Mike Piazza, lead trial counsel in the SEC's case against Mr. Yuen. The U.S. attorney's office in Los Angeles did charge Mr. Yuen with one criminal count of obstruction of justice for destroying evidence during the SEC investigation -- including deleting his computer hard-drive. That led to a deal last fall between Mr. Yuen and federal prosecutors under which Mr. Yuen was to serve six months of home detention and pay slightly more than $1 million in fines and charitable contributions. In a split with the Justice Department, the SEC submitted a letter to the judge describing how Mr. Yuen's evidence destruction impeded their investigation. Citing the letter, a U.S. District Judge overseeing the criminal case rejected the deal, saying that the sentence didn't measure up to the scope of Mr. Yuen's crime. Prosecutors defend their handling of the case against Mr. Yuen. "He took a felony conviction and agreed to a substantial fine," said Assistant U.S. Attorney Ranee Katzenstein. "It recognized that he accepted responsibility." Four other former Gemstar executives have opted to settle fraud charges with the SEC, and Gemstar's former auditor, KPMG, and four of its employees also settled SEC charges that they failed to "exercise professional skepticism," by relying excessively on the "honesty of management." Gemstar paid $10 million to settle SEC charges. Gemstar's accounting troubles first drew public attention on April 2, 2002, when the company's stock plunged 37% in a single day. The drop followed disclosures that it had booked revenue it never received over the preceding two years. Mr. Yuen had built the company around a profitable technology that made it easier to program VCRs. But it was his patents covering the technology used to create on-screen channel listings for cable and satellite providers that made Wall Street a fan. Analysts believed Mr. Yuen's proclamations that a Gemstar screen would soon be the first thing millions of people saw when they turned on their TVs. In the fall of 2000, Mr. Yuen was predicting that advertising sales on cable-channel guides would become a major new revenue stream for Gemstar, bringing in more than $100 million in 2001. But other Gemstar executives repeatedly warned Mr. Yuen that the projections were too ambitious, according to evidence presented at the SEC trial. In August 2000, Joe Keiner, the former president of TV-Guide who became co-president of Gemstar after the company merged with News Corp.'s TV-Guide, wrote an email to Mr. Yuen: "We are in danger of setting ourselves up for the potential of significant failure....We may well embark down the wrong potential road and get into a meltdown." Mr. Keiner left the company about six months later. Over the next year, the SEC says, Mr. Yuen used a range of improper tactics to inflate Gemstar's revenue to meet his ambitious projections, including recording "phantom" revenue under expired contracts and booking "round-trip" barter transactions with no economic substance. ================================ George Antunes, Political Science Dept University of Houston; Houston, TX 77204 Voice: 713-743-3923 Fax: 713-743-3927 antunes at uh dot edu Reply with a "Thank you" if you liked this post. _____________________________ MEDIANEWS mailing list medianews@twiar.org To unsubscribe send an email to: [EMAIL PROTECTED]
